In December 2019, the Singapore Court of Appeal (“SGCA“) in BNA v BNB ruled on the interpretation of an arbitration agreement that provided for disputes to be submitted to the Singapore International Arbitration Centre (SIAC) for “arbitration in Shanghai”. The SGCA held that “arbitration in Shanghai” naturally referred to the arbitral seat and concluded that PRC law governed the arbitration agreement in the agreement out of which the dispute arose. An analysis of the court’s decision in BNA v BNB can be found here.
Since the arbitration agreement in BNA v BNB provided for SIAC administered arbitration seated in Shanghai, the arbitral seat and governing law of the arbitration agreement potentially had critical implications for the validity of the arbitration agreement. This is because it is uncertain whether under PRC law, an arbitration agreement for foreign-related disputes is valid if it provides for arbitration in China administered by a non-Chinese arbitral institution. The SGCA did not decide whether the arbitration agreement was valid under PRC law.
The case recently reached the Shanghai No. 1 Intermediate People’s Court (“Shanghai Court“) which determined that the agreement was valid. This article explains why the Shanghai Court’s decision is another important step in aligning China’s international arbitration market with modern standards and global trends in international commercial arbitration.
Foreign businesses typically conduct business in China through Foreign Invested Enterprises (FIEs), such as Sino-foreign (equity or co-operative) joint ventures and wholly foreign-owned enterprises (WFOEs). For various reasons, foreign businesses usually prefer arbitrating disputes outside China. However, since FIEs are considered PRC domestic entities, their freedom to arbitrate disputes offshore is restricted as PRC law requires that domestic disputes must be arbitrated in China, while parties are permitted to arbitrate their disputes offshore only if the dispute is foreign-related.
Pursuant to Article 16 of the PRC Arbitration Law, an arbitration agreement must designate an “arbitration commission”. The PRC Arbitration Law does not define “arbitration commission”. However, it requires that the arbitration commission is registered with the Chinese authorities (Article 10) and a member of the China Arbitration Association (Article 15). The requirements for arbitration commissions in the PRC Arbitration Law have been widely debated with regard to foreign-related disputes and interpreted by many (including courts) as effectively to mean that foreign arbitral institutions must not administer arbitrations seated in China.
In around 2013, the Supreme People’s Court (SPC) in Anhui Longlide decided that an arbitration agreement that provided for arbitration administered by the International Chamber of Commerce (ICC) in Shanghai was valid. The SPC held that the arbitration agreement contained all of the following elements required by Article 16 of the PRC Arbitration Law for an arbitration agreement to be valid: (i) an express intention to arbitrate, (ii) the matters to be submitted to arbitration, and (iii) a designated arbitration commission. Although the SPC did not address how this position could be reconciled with the registration requirement under Article 10, its reply was seen by many as a sign of opening-up the international arbitration market in China to foreign institutions.
Anhui Longlide has provided support for the more liberal view that foreign arbitral institutions may administer arbitrations of foreign-related disputes in China. The Shanghai Court’s recent decision in BNA v BNB is yet another decision that supports this view.
- The decision of the Shanghai Court
The parties’ dispute had reached the Singapore courts because the respondent in the arbitration (“R“) had sought a declaration that the arbitral tribunal lacked jurisdiction. In the arbitration, R had challenged the tribunal’s jurisdiction on the basis that the arbitration agreement was invalid under PRC law because it prohibited a foreign arbitral institution (here SIAC) from administering an arbitration seated in China. However, the majority of the tribunal had affirmed jurisdiction, holding that the arbitration was seated in Singapore and the arbitration agreement was governed by Singapore law. R then sought a declaration from the Singapore courts that the tribunal lacked jurisdiction.
The SGCA noted in its judgment that the majority of the tribunal’s determination was made on the erroneous premise that the arbitral seat was Singapore and the arbitration agreement was governed by Singapore law. However, the SGCA did not express any concluded view as to whether the arbitration agreement was valid under PRC law. This is because its decision on jurisdiction would not be binding upon the tribunal, as the arbitration was not seated in Singapore.
Following the SGCA’s ruling in December 2019, the tribunal terminated the SIAC arbitration upon R’s request.
In January 2020, the claimant in the arbitration (“C“) took the matter to the Shanghai Court, asking it to confirm the validity of the arbitration agreement under PRC law. R opposed the application, arguing that a foreign arbitral institution does not qualify as an “arbitration commission” under the PRC Arbitration Law.
The Shanghai Court rejected R’s arguments and affirmed the validity of the arbitration. In particular, the court relied on the SPC’s decision in Anhui Longlide:
- Arbitration was a consensual dispute-resolution method which, in respect of its substance, did not involve the question of whether the arbitration market in China had opened up.
- It was necessary to take into account the SPC’s decision in Anhui Longlide which had binding effect, as well as China’s efforts in catching-up with the general trends in international commercial arbitration.
- The argument that foreign institutions could not administer arbitrations seated in China lacked the support of any express prohibition under PRC law and went against the general trend in international commercial arbitration.
- At the time the PRC Arbitration Law was enacted, the legislature may have lacked an international perspective. This resulted in a disconnect between the PRC Arbitration Law and the general trends in international commercial arbitration. The question of whether “arbitration commission” only refers to Chinese arbitration commissions had been left open and could only be finally answered by the legislature. However, the judiciary and the legislature should complement one another; the SPC in Anhui Longlide had filled the gap which the legislature had left open.
- The Shanghai Court’s decision is a further push in China’s efforts to align its arbitration law with international arbitration standards and best practice
The Shanghai Court’s decision is another strong indication that the Chinese courts that continue to align China’s international arbitration market with standards and practices in other leading international arbitration hubs. The decision fits in neatly with various progressive developments in China’s international arbitration market in the recent years:
- In late 2015, the Shanghai Court in Golden Landmark was the first Chinese court which, in a reported case, recognised and enforced a foreign award made in an arbitration between two WFOEs incorporated in the China (Shanghai) Pilot Free Trade Zone (FTZ) (i.e., two PRC entities). This was a significant development because the court interpreted the “other circumstances” limb of the SPC’s interpretation broadly and identified facts that made the dispute foreign-related. By contrast, other Chinese courts had previously adopted a more stringent approach and refused enforcement merely because all parties where PRC entities, without considering whether other circumstances existed that made the dispute foreign-related.
- The SPC subsequently issued an opinion that provided for several arbitration-friendly guidelines for Chinese courts handling cases involving pilot FTZs. One of these guidelines can be seen as an endorsement of the Shanghai Court’s decision in Golden Landmark: if two WFOEs which are registered within a pilot FTZ agree on offshore arbitration, the courts should not hold their arbitration agreement as invalid merely on the ground that the dispute is not foreign-related. Similarly, if a party opposes recognition or enforcement of an offshore award merely on the ground that the dispute is not foreign-related, the courts shall not uphold the objection if (i) at least one of the parties is a FIE registered in a pilot FTZ, (ii) the parties agreed to arbitrate disputes outside China, and (iii) the party resisting enforcement was either the claimant in the offshore arbitration or the respondent who participated in the arbitration without challenging the validity of the arbitration agreement.
- In November 2015, the Hong Kong International Arbitration Centre (HKIAC) set up a representative office in the China (Shanghai) Pilot FTZ. SIAC and the ICC followed in 2016. However, as far as we are aware, none of these three institutions’ offices in China have so far provided case management services.
- In 2019, the Shanghai Municipal Bureau of Justice started another pilot free trade programme in the new Lin-Gang area in Shanghai. The programme which allows reputable foreign arbitral institutions registered with the Chinese authorities to set up a business organisation in the area and conduct civil and commercial arbitrations.
- Takeaway points
Parties adopting arbitration as dispute resolution method want certainty. Notwithstanding the welcome decision of the Shanghai Court, the position is not yet sufficiently certain for parties to agree on arbitration of foreign-related disputes in China administered by a foreign institution. Less progressive courts in other parts of China may take a more stringent view than the Shanghai Court. Although the SPC may ultimately overrule any decisions contrary to the one by the Shanghai Court and confirm the validity of the underlying arbitration agreement, such an outcome cannot be obtained without a lengthy and costly jurisdictional battle.
Hence, until this issues has been settled with certainty, parties should remain wary and consider very carefully whether to adopt arbitration in China administered by a foreign institution for foreign-related disputes.
We expect that the trend of China aligning its international arbitration market with other leading arbitration hubs will continue. We will continue to monitor and report on developments in this area.
 References in this article to China are references to Mainland China. References to Chinese institutions or commissions or courts are references Mainland Chinese institutions or commissions or courts.
 BNA v BNB & Anor  SGCA 84; references to BNA v BNB in this article are general references to the arbitration and related court proceedings between the parties involved in the underlying dispute.
 By contrast, this interpretation has been uncontroversial with regard to purely domestic disputes; cf. also the SPC’s decision in Jiangsu Aerospace Wanyuan Wind Power Co Ltd v LM Wind Power (Tianjin) Co Ltd ((2012) Min Si Ta Zi No. 2 Reply).
 BNB v BNA (2020) Shanghai 01 Civil Special 83.
 In determining whether a dispute is “foreign-related”, PRC courts consider whether (i) at least one of the parties is foreign, or (ii) the habitual residence of at least one of the parties is outside China, or (iii) the subject matter is outside China, or (iv) the legal facts which give rise to, modify, or terminate the civil relation occur outside China, or (v) there exist any other circumstances that may be regarded as a foreign-related civil relation: see the SPC’s Interpretation on Several Issues Concerning the Law on the Application of Laws to Foreign-Related Civil Relations (Fa Shi (2012) No 24, 28 December 2012).
-  Arbitration Law of the People’s Republic of China; c Article 6 of the PRC Arbitration Law which allows parties to choose the “arbitration commission” that would administer an arbitration seated in the PRC.
 Reply of the SPC to the Request for Instructions on Application for Confirming the Validity of an Arbitration Agreement in Anhui Longlide Packing and Printing Co., Ltd. v. BP Agnati S.R.L. ((2013) Min Si Ta Zi No. 13, 25 March 2013).
 See Züblin International GmbH v Wuxi Woke General Engineering Rubber Co Ltd ((2003) Min Si Ta Zi No. 23 Reply; Shenhua Coal Trading Co Ltd v Marinic Shipping Company ((2013) Min Si Ta Zi No. 4 Reply; cf., for example, the Singapore High Court in BNA v BNB  SGHC 142 and the Hong Kong Court of First Instance in Z v A  HKEC 289 which both expressed doubts as to the validity of the arbitration agreement if they determined that the arbitration was seated in China.
 Reply of the SPC to the Request for Instructions on Application for Confirming the Validity of an Arbitration Agreement in Anhui Longlide Packing and Printing Co., Ltd. v. BP Agnati Srl ((2013) Min Si Ta Zi No. 13, 25 March 2013).
 The third arbitrator disagreed with her two co-arbitrators, expressing the view that the proper law of the arbitration clause was PRC law and that the clause was invalid because pursuant to PRC law, the dispute was a domestic dispute and PRC law prohibited a foreign arbitral institution from administering an arbitration of a domestic dispute.
 See fn. 5 above
 See, for example, Beijing Chaolaixinsheng Sports and Leisure Co., Ltd v Beijing Suowangzhixin Investment Consulting Co., Ltd (2013) Er Zhong Min Te Zi No. 10670
 See SPC’s Opinion on Providing Judicial Safeguards for the Construction of Pilot Free Trade Zones (Fa Fa (2016) No. 34, 30 December 2016)